How Did Communist China Become a Capitalist Superpower?

scohn0227china

In his new book, “Competing Economic Paradigms in China,” Steve Cohn examines how China’s economic policy went from Maoist to “iron rice bowl” to neoliberal

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SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore.

How did China’s struggling economy in the 20th century, that underwent a communist revolution, then a counterrevolution that gave rise to neoliberalism, emerge as a global capitalist superpower in the 21st century? That’s a question we’re going to take up.

In his new book, Steve Cohn examines the reasons for these changes and how economic policy and theory in China change alongside these historical events. Professor Steve Cohn teaches economics at Knox College in Illinois. He taught at the China Studies Institute in Beijing. His most recent book is “Competing Economic Paradigms in China: The Co-Evolution of Economic Events, Economic Theory and Economic Education from 1976 to 2016.” Professor Cohn, pleasure to have you on.

STEVE COHN: It’s a pleasure to be here.

SHARMINI PERIES: Professor Cohn, in your book you analyze the transition of the Chinese economy from Maoist to “iron rice bowl” policy to a neoliberal policy. What kind of domestic factors contributed to this transition?

STEVE COHN: Yeah. My book’s really a sociology of knowledge study, the replacement in China of Marxist economics by neoclassical economics, and that of course facilitated neoliberal policies. So it’s a fascinating sociology of how people came to think about things in a different way, and of course that facilitated different policies. They’re both domestic and international or Western pressures or actors in the story, but you asked about the domestic ones, so I’ll say something about that.

There really were about five major domestic factors that promoted the expansion of neoclassical economics in China. I might digress for a second to say in 1978, when the reforms began, the entire Chinese economics profession, the teaching of economics, the curriculum and schools, the public discussion was conducted in Marxist language. Today, all of that has changed. It’s conducted in neoclassical language. The curriculum in universities, the journals, the editorial policy, the promotion policy, the criteria for tenure has been reconfigured to be consistent with neoclassical economics.

So how did that happen? And there are five domestic factors that facilitated it early on and have continued. The first actually is at the highest level of the state. I think the Chinese government, starting with Deng Xiaoping but has continued since then, came to the conclusion that certain capitalist-oriented policies were necessary to increase the social surplus under the state’s control and also to prevent China from falling behind technologically. These leaders, I think, felt that neoclassical economics was a reliable theory that would facilitate this project of adopting some capitalist techniques, and they supported it very aggressively in many ways.

The next supporters were mid-level Party people. Now, often people think that the bureaucrats felt threatened by marketization and were some of the opponents that had to be pulled into it, but actually I think early on, mid-level Party people realized that they were probably able to transmit inter-generationally their privilege better through private property and marketization than in the planned economy. So I think these people were also influential in promoting an economic theory that facilitated a marketization and their inter-generation transfer of privilege.

The third is interesting in a different way. It is the residue of Chinese professionals’ participation in global markets. There are armies of professionals — accountants, bankers, lawyers, journalists — that accompany the economy. And when the Chinese began to participate more widely in international markets, they learned or were socialized into speaking like neoclassical economists. The categories that they referred to, the reference points were the language of neoclassical economics. It was kind of the residue of their experiences.

The fourth factor, I think, was Chinese students interested in gaining perhaps access to Western jobs, and neoclassical economics was seen as a credential that could help. And the last was, I think, the scientific appearance of neoclassical economics. It phrases a lot in mathematics, and after the Cultural Revolution and the highly-politicized language of economics, neoclassical theory appeared scientific.

And I think those five things together led to a welcoming of neoclassical economics. It’s an interesting phenomenon because people weren’t just taught neoclassical economics, and it was just echoed in the media; it was, as I said, the residue of the experience with markets mediated by international marketeers who participate in markets.

Here’s a kind of symbol of the whole process. China TV started airing programs like those in the United States of financial news. And these market-following programs use neoclassical categories, and there even was apparently a show like Donald Trump’s The Apprentice. So the process of culturally shifting as a sociological process, that had many dimensions. The foreign role is also very active, and if you want, later we can discuss that.

SHARMINI PERIES: Yeah. Before we move on to the external factors, would you consider Tiananmen Square protests to be one of the factors that transformed this transition?

STEVE COHN: Well, the Tiananmen Square is very interesting because it’s both a result and then a subsequent cause of reform. The reforms started in 1978, and Tiananmen Square’s 1989. And in the years leading up to Tiananmen Square, there’s very rapid inflation in China, as much as 30%. And urban wages are not keeping up with inflation, and that seems to many to violate a social contract, an implicit contract with the state.

At the same time, there’s a lot of corruption. The same Party officials I mentioned earlier who see an opportunity to privatize public assets and to take advantage of their position to divert goods from the planned economy to the private economy and many other mechanisms, the public is aware of this, and there’s a lot of resentment of the new rich in terms of unfair acquisition of wealth.

So the combination of inflation and falling real wages or a sense of violation of implicit contracts and illegitimate wealth, combined with the students’ focus on democracy, which is what often the public in the United States thinks the protests were about, and it was partially about that, but it was also about the economy effects of the transition, all those things came to a head. What really worried, I think, the Chinese state was the workers and the broader population. The students were troublesome, but not, I think, a crisis until they were joined with these other objections.

And so then we have the Tiananmen Square, and the repression following Tiananmen Square then allows the state to continue marketization with price decontrol and privatization. So there is an initial kind of interruption after Tiananmen Square, a kind of stepping back from the process of restructuring. But when it renews in around 1992, it’s even more vigorous because the state is obviously not going to tolerate objections, which accompany price decontrol and privatization.

So Tiananmen Square I think is an outcome of the early reform and then a prerequisite for the last stages, which are … Initially, the Chinese reform was reform without losers, where the state covered the people that were disadvantaged by the changes, and a lot of people were advantaged. But over time, that commitment erodes, and after Tiananmen Square, the state can impose costs on people from the transition, and in particular the state-owned enterprises and about 30 to 50 million unemployed workers in the late ’90s. That was only possible because, I think, of the repression of the Tiananmen Square. So it both was a result and a cause of future reforms.

SHARMINI PERIES: And let’s now shift to external factors. For example, do you believe that the fall of the Soviet Union played a role in convincing the Chinese Communist Party to take a new direction or suffer similar consequences as the fall of the Soviet Union and what it did to the economy of Russia? Or are they already committed to this new direction for a while before the fall of the Soviet Bloc, and their implementation just happened to be consequential?

STEVE COHN: That’s a good question. And I’m not an expert, but it’s my feeling that the Chinese reforms were largely Chinese referenced. As early as 1979, Deng Xiaoping promulgated the Four Cardinal Principles, which eventually are going to join marketization with absolute authority for the Party. And this preceded the Russian and the former Soviet Union dissolution.

The Chinese also had a phrase for how they approached restructuring, which was “crossing the river, groping for stones,” which is a very experimental kind of strategy. Unlike the shock therapy in the Soviet Union and Eastern Europe, this strategy was experimental, gradual, and cautious. And again, that preceded, I think, the dramatic events in the late ’80s and early ’90s.

So while I think these events confirm for the Chinese the wisdom of their gradualism and the wisdom of not liberalizing politically very much, I think they had these strategies prior to the difficulties of the former Soviet Union. But that reinforced, I think, their instincts.

SHARMINI PERIES: All right. Let’s continue that foreign influence over the Chinese economic policies and transformations it underwent. You write about international or U.S.-based organizations such as the American Economic Association, the Ford Foundation, the World Bank, and other such institutions that the Chinese sort out to influence their economic policy and drive the direction of a capitalist economy that they adopted. The interesting point you make about this is that this influence was invited. Why did the Chinese government officials accept this or want this kind of influence?

STEVE COHN: Well, that’s a great question. The level of Western engineering or greasing the rails so that the Chinese reformers or restructurists could travel quickly was extensive. And I think the fact that it was invited dulls the possible imperialist kind of echoes because they were doing things that were not behind the back of the Chinese, were actually invited by the Chinese. That phrase “invited influence” is from Norton Wheeler, who is a historian of some foundations in China.

In any case, there was tremendous activism. Just to give you some illustrations that makes it even more puzzling how come the Chinese tolerated this, the most important thing was the funneling of the best and brightest graduate students in economics in China into American PhD economics programs. This was an organized effort with the Chinese Academy of Social Sciences and other okays from the Chinese side and the Ford Foundation, American Economic Association especially on the American side. But it was a very, very influential policy because these best and brightest, so to speak, economists who studied in the US for six years getting their PhDs eventually came home, some of them, and reorganized the Chinese economics profession. So this was a major Western project self-consciously pursued and amazingly successful.

They also funded the West think tanks in China of neoclassical variety. They rewrote Chinese economics textbooks. Again, partially invited by the Chinese state. They were employing as junior partners Chinese economists as researchers to apprentice themselves to learn how to do neoclassical research. They reorganized the Tsinghua School of Management to be more in line with Western management schools. And they created a Young Chinese Economists Society of Chinese students in the United States and in the West that was trying to create a supportive culture and facilitate their return to China. There was initially some difficulty getting the PhDs in the United States to actually go home.

But this was a very active process, and so the question you asked is, why was China so complicit or, if you don’t want to put it negatively, so cooperative with this process? And I think there’s two things. One is the Chinese leadership and Chinese intellectuals thought that neoclassical economics had two dimensions: one you might think of as a scientific, engineering-oriented dimension, and one that they realized was ideological and political and infused in neoclassical economics with broader idea. It’s not just algebra. And they recognized this. But I think they underestimated the difficulty of separating the two. The paradigms like neoclassical economics are a cohesive whole, and they’re intertwined, the ideological and the what you might think of as engineering or apolitical. And I don’t think they realized the quality of that intertwining.

The second thing is I don’t think they realized the socialization that takes place when people go to economics graduate school. You don’t just study neoclassical economics; you become a neoclassical economist, and you see the world in a certain way before you even interpret it. There’s a very strong totalism that comes from being a graduate student and studying four to six years with other graduate students and reading similar things and talking and learning to see the world in a certain way. And I don’t think the Chinese even to this day fully realize the extent to which there’s a socialization, as well as an intellectual kind of understanding involved with graduate school.

So I think they underestimated it, that impact on the students and the difficulty of unpacking these ideological and political factors. And I don’t think they to this day actually have a full sense of it. So I think that’s what happened. And the other qualifier is that I’m not so sure the current leadership is that concerned that the ideological factors are in the economics paradigm because it’s not clear to me that they are trying to avoid the ideological momentum that the paradigm imparts. But initially, I don’t think they fully realized it.

SHARMINI PERIES: Professor, now China has become the industrial hub of the world. It’s even nicknamed “the factory of the world.” And recently, it has become a fad in the US to speak about China threatening U.S. global hegemony with its economic power. Now, is this economic power a result of neoliberal policies by keeping industrial wages low and maintaining a trade surplus? And if so, what for? What is the purpose that the Communist Party has? You stress that all this is well thought out, that it is the intent of the Communist Party to have these well-informed policies to transform its economy, but it’s hard to understand what end or result they want.

STEVE COHN: Well, you raise interesting questions, and it’s hard to judge the motives of other people. You can see what they’ve done; you’re not quite sure what they’re thinking. There certainly have been a lot of social problems, environmental problems, inequality in particular, financial fragility, the problem of various debt crises in China. But my suspicion is that the Chinese leaders feel that their strategy has in some important ways to them empowered China. And I think that they probably feel they can deal with problems of environmental and other side effects of this.

What’s interesting in terms of paradigm competition is trajectories. In other words, different theories have different counterfactuals, which means what would’ve happened if we did something different, and they can disagree because it’s hard to prove one way or the other. And they have different trajectories, what’s going to happen in the future.

I think the Kuznets curve, which is a concept in neoclassical economics that says capitalist economies, as they evolve, go through a period of very high inequality and then reduced inequality. An analogy is the environmental Kuznets curve. Capitalist economies, as they grow, create environmental crises, but then the wealth, the technology, and the will to address these problems. And of course Marxist trajectories are different. They see the capitalist economy unable to stop itself, like a bicycle, only stable in motion, and eventually it gets so big it’ll crash into the wall.

But I think the Chinese have the positive Kuznets curve image in their mind that they can ride the tiger of capitalism and contains its … whether it’s inegalitarian or environmental or financial debt problems and benefit from the power that it imparts. That’s not what Marxist economics would imply and some other heterodox paradigms. But I think within the neoclassical paradigm there is an optimism about how a growing economy creates the resources to address its problems, and my guess is the Chinese have that viewpoint, and they also are quite pleased with the power that the capitalist economy has generated for the state.

SHARMINI PERIES: All right. Professor Cohn, there’s so many more questions I need to ask or want to ask you that our audience, who is very interested in China, wants answered, but our time has come to an end. And I would like to invite you back to another segment, or two or three even, with The Real News in relation to your book. I thank you so much for joining us today.

STEVE COHN: Well, thank you. It’s been a pleasure on my part, too.

SHARMINI PERIES: And thank you for joining us here on The Real News Network.